ISSN 1010-9536 EXPORT POTENTIAL OF BANGLADESH IN BIMSTEC 197 Export Potential of Bangladesh in BIMSTEC Free Trade Area: Evidence from Gravity Model Ishtiaque Selim 211 Challenges of India’s Global Emergence Abu Salah Md. Yousuf Mohammad Jasim Uddin 226 Maritime Verdicts and Avenues of Resource Exploration for Bangladesh Md Shahidul Hasan 241 Recent Security Scenario in Afghanistan: Roles and Impacts of the ISAF and the Way Forward M Ashique Rahman 262 Climate Change – A Security Threat for Bangladesh: The Role of Armed Forces Mostaque Ahmad Volume 35 Number 3 2014 I Contacts Designation Telephone (Oce) E-mail Chairman, Board of Governors 88-02-9347914 [email protected] Director General 88-02-8312609 [email protected] Research Director-1 88-02-9331977 [email protected] Research Director-2 88-02-8360198 [email protected] VOLUME 35 NUMBER 3 JULY 2014 Disclaimer: The views and opinions expressed in this Journal are solely of the authors and do not reect the ocial policy or position of Bangladesh Institute of International and Strategic Studies (BIISS). Bangladesh Institute of International and Strategic Studies Dhaka Chief Editor A K M Abdur Rahman Editor Md Iftekhar Ahmed Associate Editor Shaheen Afroze Assistant Editors Segufta Hossain Razia Sultana Md. Muhibbur Rahman Tk. 200.00 US$ 20.00 Tk. 800.00 US$ 80.00 GraphNet Limited 95, Naya Paltan, 1st Floor, Dhaka-1000, Bangladesh Phone : 9354142, 9354133, e-mail: [email protected] [email protected], website: www.graphnet.com TABLE OF CONTENT VOLUME 35 NUMBER 3 JULY 2014 Ishtiaque Selim Export Potential of Bangladesh in BIMSTEC Free Trade Area: Evidence from Gravity Model 197 Abu Salah Md. Yousuf Mohammad Jasim Uddin Challenges of India’s Global Emergence 211 Md Shahidul Hasan Maritime Verdicts and Avenues of Resource Exploration for Bangladesh 226 M Ashique Rahman Recent Security Scenario in Afghanistan: Roles and Impacts of the ISAF and the Way Forward 241 Mostaque Ahmad Climate Change – A Security Threat for Bangladesh: The Role of Armed Forces 262 BIISS JOURNAL, VOL. 35, NO. 3, JULY 2014: 197-210 Ishtiaque Selim EXPORT poteNTIAL OF BANGLADESH IN BIMSTEC FREE TRADE AREA: EVIDENCE FROM GRAVITY MODEL Abstract Bangladesh has been striving hard to exploit SAFTA for boosting its trade and economic relations with the South Asian neighbours. But this free trade agreement is yet to bring sufficient dividends for Bangladesh. While the role of regional integration in the development process is undeniable, the slow progress of SAFTA in South Asia is a source of frustration for a developing nation like Bangladesh. Accordingly, in an effort to yield trade and economic gains, Bangladesh has become a member of BIMSTEC-FTA. This article uses augmented gravity equation to estimate Bangladesh’s export potentials in BIMSTEC-FTA. It estimates an export equation for Bangladesh taking some relevant variables into account. Also, the model undergoes some diagnostic tests. On the basis of the tests the model is cleared of multicollinearity and heteroscedasticity problems. The results from the estimations show that Bangladesh has export potentials in BIMSTEC-FTA. Therefore, the country’s economy might take advantages from boosting exports to developing economies of BIMSTEC, namely, India and Thailand. 1. Introduction Regional integration, over the last few years, has occupied an important place in the development strategies and the policy debates. As an integral part of the overall integration process, regional trading agreements (RTAs) have also proliferated in the past few decades. Most of the countries of the world being members of such arrangements, it is obvious that an enormous amount of trade has taken place under RTAs. In fact, these agreements govern literally two-thirds of global trade.1 Countries, in order to reap benefits from regional integration, are increasingly getting more inclined to be a part of such RTA. This trend leaves hardly any nation beyond such arrangements. With its active engagement in South Asian Free Trade Area (SAFTA) – a multilateral intra-regional agreement in South Asia – Bangladesh is no exception in this regard. However, SAFTA has been subject to discussions, debates and criticisms I shtiaque Selim is Assistant Professor, Department of Economics, Jagannath University, Dhaka. His e-mail address is: [email protected] © Bangladesh Institute of International and Strategic Studies (BIISS), 2014. 1 M. Schiff and L. A. Winters, Regional Integration and Development, World Bank and Oxford University Press: Washington DC, 2003, p. 1. 197 BIISS JOURNAL, VOL. 35, NO. 3, JULY 2014 from academia and intelligensia in South Asia ever since its ratification in 2006. While a growing body of literature suggests that trade liberalisation under the framework of SAFTA would generate welfare and trade gains in South Asia, many still remain sceptical about the success of this RTA.2 The fact is that progress of SAFTA has not gained much pace since its inception owing to some challenges – ranging from political to institutional - that encircled this trading bloc. Hence, some South Asian countries have opted to follow the bilateral route in the form of India-Sri Lanka or Pakistan-Sri Lanka FTA deal. Formation of multilateral organisations such as the Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation (BIMSTEC) is also marked as an effort to boost trade and economic relations in the region and beyond. As a party to BIMSTEC, Bangladesh is also trying to make headway in negotiating trading arrangements regionally in order to intensify cooperation with the neighbouring nations. Established in 1997, BIMSTEC is a multilateral sub-regional body, which is comprised of five South Asian nations, namely, Bangladesh, Bhutan, India, Nepal and Sri Lanka and two Southeast Asian nations, namely, Myanmar and Thailand. The sub- regional organisation, thus, literally connects South Asia with Southeast Asia - one of the most rapidly growing regions in the world. BIMSTEC has a combined GDP of US$ 2,454 billion, accounts for a trade volume worth US$ 1,154 billion and brings roughly 1.5 billion people under the same umbrella.3 The organisation is aimed to foster cooperation in a number of areas and trade is one of those. To deepen the trade relations, BIMSTEC nations signed a free trade deal, known as BIMSTEC-FTA, in 2004. The agreement is expected to be implemented by the middle of 2023. Bangladesh as a party to BIMSTEC-FTA is likely to achieve trade gain, especially export. As such, studies on the impacts of BIMSTEC-FTA on Bangladesh trade are of great importance. It needs to be noted that there is a relative dearth of literature on BIMSTEC-FTA. However, some studies resort to quantitative technique to measure the effect of this free trading area. Rahman and Rahman (2004)4, in one of the early studies on BIMSTEC- FTA, reported untapped trade potentials amongst the BIMSTEC trading partners. The study calculated a gravity equation by using a set of pre-estimated parameters.5 Banik 2 See, for example, S. J. Bandara and W. Yu, “How Desirable is the South Asian Free Trade Area? – A Quantitative Economic Assessment”, SJFI-Working Paper No. 16, 2001, available at http://www.foi.life.ku.dk/ publikationer/~/media/migration%20folder/upload/foi/docs/publikationer/working%20papers/2001/16. pdf.ashx, accessed on 25 May 2014. Also see, U. Wickramasinghe, “Operationalizing SAFTA: Issues and Options”, South Asian Yearbook on Trade and Development, Center for Trade and Development, New Delhi, 2006, pp. 389-414; S. M. Hossain and I. Selim, “Regional Cooperation in South Asia: Future of SAFTA”, BIISS Journal, Vol. 28, No. 2, 2007, pp. 163-183. 3 T. K Premadasa, "BIMSTEC: Srilanka's next FTA?", 20 March 2014, available at www.ft.lk/2014/03/20/ bimstec-sri-lankas-next-fta, accessed on 05 June 2014. 4 AKM A. Rahman and S. Rahman, “Potentials of Trade Cooperation among the BIMST-EC Countries”, BIISS Journal, Vol. 25, No. 2, 2004, pp. 140-158. 5 These parameters were estimated by International Trade Commission’s (ITC) market analysis section using export data from developing economies. 198 EXPORT POTENTIAL OF BANGLADESH IN BIMSTEC (2007)6 estimated both export demand and export supply functions by using two stage least square (2SLS) and three stage least square (3SLS) methods. The study taking some geographical characteristics into account reveals that the prospect of intra-BIMSTEC trade is quite bright. Another study, by Kabir and Salim (2010)7, applied augmented gravity model to analyse trade pattern among BIMSTEC members. The authors claimed that the member economies’ exports would be positively affected by this sub-regional bloc. Also, Hossain (2012)8 used computable general equilibrium (CGE) model to identify considerable welfare gains of BIMSTEC-FTA members. Some other notable studies have been conducted by Bhattacharaya (2007)9, Chakraborty (2007)10, Gilbert (2008)11 and Strutt (2008)12. These studies generally depict positive gains from BIMSTEC-FTA. This paper makes an attempt to examine the potential exports of Bangladesh in BIMSTEC-FTA. The paper, in deriving the trade potential, computes a typical gravity model by using ordinary least square (OLS) method of multi-variable regression analysis. The paper is divided into four sections. Section one is the introduction. Section two, gives a background of BIMSTEC-FTA. Section three estimates trade potentials of Bangladesh in the trading arrangement. In doing so, this section provides a theoretical background of gravity model and then covers the issues of estimation of gravity model. Finally, section four concludes. 2. BIMSTEC-FTA: A Brief Background BIMSTEC has been regarded as the outcome of Thailand’s “Look West” policy and India’s “Look East” policy.13 These policies were meant to extend extensive cooperation in some important areas between South Asia and Southeast Asia. BIMSTEC, therefore, as mentioned earlier, had bridged these two regions. The idea of forging economic ties between these two regions was first mooted by Thailand back in 1994.